Why the stock market's first reaction to the Trump-Xi trade 'cease-fire' is bullish

Stocks kicked off the week with a rally, boosted by President Donald Trump's trade truce with China and a de-escalation of tensions that have been weighing on markets for months.

The Dow Jones industrial average closed up 288 points, or 1.1 percent higher, at 25,826.

Investors got as good an outcome as they could have expected from this weekend's dinner meeting between Trump and Chinese counterpart Xi Jinping. The U.S. backed off on its threats to boost the level of tariffs already in place on China-made goods from 10 to 25 percent on Jan. 1. Trump also held off on initiating fresh tariffs on another $267 billion in Chinese goods during a 90-day cease-fire agreement set to go into effect at the start of 2019. Beijing agreed to make a "very substantial" purchase of many U.S. goods, including agriculture products.

The cease-fire in the trade spat is seen as "alleviating a major overhang" for financial markets, although a "permanent truce" has yet to be reached, Julian Emanuel, an equity strategist at BTIG, a global financial services firm with offices in New York, noted in a report.

While nobody on Wall Street believes the road to a broad, final trade agreement between the two nations will be easy or free of risk, the thaw in relations has boosted investors' hopes for a deal.

"Negotiations over those 90 days will no doubt be rocky, but this is the all-clear signal that nobody is going to walk off a cliff," noted Donald Luskin, chief investment officer at research firm TrendMacro.

Stocks have been very volatile since the Standard & Poor's 500 stock index hit its high for the year Sept. 20. In late November it suffered its second "correction" of the year, or drop of 10 percent or more from a high. It then rebounded nearly 5 percent last week and rose another 1.1 percent Monday to boost its year-to-date gain to 4.4 percent.

The broad market index is now 4.8 percent off its record closing high.

Here are three major reasons why Wall Street is viewing the new 90-day negotiation period in a positive light.

1. Good signal for economy

Fears of a global slowdown due to slowing sales, higher prices and product supply chain disruptions caused by tariffs has been a top worry for markets since the trade tiff between the U.S. and China emerged early this year.

The hope is the 90-day cooling-off period will lead to fairer trade terms, lower tariffs or perhaps the complete elimination of these trade levies altogether, paving the way for fewer obstacles in the world economy.

"The truce ... has gone some way in calming investor fears over the state of global growth," Dean Popplewell, vice president of market analysis at currency trading firm Oanda, said via email.

2. Bolsters outlook for U.S. sales to China

Trade tensions and import levies have been a negative for big U.S. companies that do a lot of business in China, such as heavy equipment maker Caterpillar and airplane producer Boeing.

China's promise to buy more goods from U.S. companies, including industrial and energy-related products, as well as to open their markets to foreigners, is seen boosting the sales and profits of companies that get a sizable chunk of their business from China.

Trump's tweet late Sunday saying China will remove or reduce the current 40 percent tariff on U.S.-built autos sold in China also provided a lift to U.S. automakers in Monday trading. Shares of Ford and General Motors were up 2.1 and 1.3 percent, respectively.

3. Positive step for tech companies

U.S. tech companies, many of which assemble their high-tech components and gadgets in China, will get a reprieve.

"The halt to additional tariffs will remove a near-term overhang on tech stocks caught in the crossfire," says Daniel Ives, a tech analyst at Wedbush Securities.

Among the biggest beneficiaries, he notes, is Apple, which builds its iPhones in China, and semiconductor companies that make their computer chips there.

Most important for Apple is that specific new tariffs as high as 25 percent targeting its iPhones and laptops are "now off the table," Ives says. "That would have been a tough gut punch to absorb" for Apple.

Apple shares closed 3.6 percent higher.

Not only does Trump's promise not to raise existing tariffs and hold off on levying fresh ones help, but there's also greater hope now that the two sides can address the more thorny issues that affect the tech space, such as intellectual property protections and the high costs related to cyberthefts and intrusions.